Markets & Finance

Spectrum Powers into S&P's Top Ten

June 08, 2005

By Kenneth Shea, Robert Gold, and Steve Biggar On June 8, Standard & Poor's Equity Research Group made changes to the S&P Top Ten portfolio -- those stocks it considers to be the best candidates for capital gains over the next 6 to 12 months. We at S&P added diversified consumer-products outfit Spectrum Brands (SPC) to the portfolio, replacing vision-care products maker Cooper Cos. (COO).

Cooper was removed from the portfolio after its shares were downgraded on June 8 to 4 STARS (buy), from 5 STARS (strong buy), by S&P Equity Research.

Spectrum, formerly known as Rayovac, makes a wide variety of products, including batteries and shaving implements. We expect its growth to accelerate after the company's recent purchase of United Industries, which extended its reach into lawn and garden care, insect control, and pet supplies (see BW Online, 5/24/05, "Spectrum Brands: Charged to the Max").

We see Spectrum posting fiscal 2005 (ending September) earnings per share of $2.58, rising to $2.97 in fiscal 2006. In our view, the company is valued well below the household-product group and our estimate of intrinsic value. Our 12-month target price on the stock is $50.

The S&P Top Ten portfolio was launched on Dec. 31, 2001. From inception through May 31, 2005, it has gained 23%, compared to a 10.1% climb for the S&P 500 index on a total return basis. For all of 2004, the S&P Top Ten rose 19.2%, vs. a gain of 10.9% for the S&P 500 (total return). Year-to-date through May 31, 2005, the portfolio advanced 2.05%, while the S&P 500 declined 0.95%.

Here's the latest list:

S&P TOP TEN PORTFOLIO

Company

Ticker

Price (6/9/05 close)

12-Month Target

Investment Rationale

Burlington Northern

BNI

47.96

65

Strong market share, rising shipping volume

Covance

CVD

44.93

61

Attractive valuation

FMC Corp.

FMC

55.67

65

Improving profit outlook

Guitar Centers

GTRC

58.67

69

Attractive valuation

Ingersoll-Rand

IR

74.37

100

Expected improvements in several end-markets

International Speedway

ISCA

55.55

71

Dominant position with NASCAR

Landstar System

LSTR

31.38

46

High returns on assets and equity

Lennar

LEN

59.30

71

Attractive valuation

St. Jude Medical

STJ

39.93

55

Positive ICD market data

Spectrum Brands

COO

36.58

50

Strong earnings outlook

Shea is director of global equity research, and Gold and Biggar are senior portfolio group analysts, for Standard & Poor's Equity Research